ePolitix.com speaks to Robert Jenkins, chairman of the Investment Management Association (IMA), to discuss the publication of a report by the Asset Management Working Group report and the challenges facing the asset management industry in the coming years.
Question: What is the Asset Management Working Group?
Robert Jenkins: The Treasury convened the group back in 2008 to consider what actions needed to be taken, by both industry and government, to ensure that the UK remains a strong and vibrant global centre for asset management, and to identify the medium and long-term challenges facing the industry.
I had the honour of co-chairing the group with the Chancellor or the Exchequer, Alistair Darling. Other members of the group included CEOs of leading asset management companies. We were also very privileged to be able to benefit from the expertise and input of senior practitioners from across the asset management industry, and representatives from other interested parties, including trade associations and the Financial Services Authority.
Our broad objective was to set out an agenda for change that would ultimately benefit the millions of consumers, both in the UK and across the EU, who invest their hard-earned cash in investment fund products. We can achieve this by applying some simple principles to future policy and regulations.
The result is the report, Asset Management: the UK as a Global Centre. It delivers 25 key findings and 22 recommendations on a diverse range of issues, including what the role of the industry should be going forward, how to maintain a competitive industry, and what we can and should do to ensure we are properly serving the needs of our customers.
What are the key findings?
First, the asset management industry must ensure that its clients understand what we can achieve for them. We exist to help them to meet their investment goals by providing access to a range of products and markets, which allow them to diversify their investment portfolios. And we do so to a degree and at a price which few individuals could achieve on their own. But we cannot guarantee riches. Our mission is not to make the client wealthy, it is to offer him the opportunity and access necessary to preserve and grow his wealth. This is sometimes misunderstood at the retail level. It is our responsibility to better ensure clients have more realistic expectations of investment risk - and ultimately the returns we can deliver.
Second, the way financial products are distributed to the retail client is confusing and conflict-prone. We need to more clearly distinguish the cost of advice from the cost of the product. Who is paid by whom, and how much, must be clear at the point of sale. This is a much greater problem in key markets on the Continent than in the UK.
Third, we recommend that the UK embrace policies to ensure that the country becomes domicile of choice for collective investment schemes. Why are such policies good for Luxembourg and Dublin but not for the UK? We need an open and honest debate. Bring Dublin to Edinburgh and Luxembourg to London, and ensure that our alternatives industry is not lost to a Dublin or a Luxembourg.
What is the significance of the report?
The Asset Management Working Group is the first such high-level task force to be convened by the government to examine the asset management sector specifically. It represents a growing awareness on the part of the authorities that this industry is a major pillar of the financial services sector, and lynch pin in the pensions and savings challenge. Not only is asset management a significant direct contributor to employment, service exports, GDP and tax revenues, but it is a major indirect contributor as well. For example, a majority of investment banking revenues ultimately involve an investor at the end of the transaction chain – be it a security, underwriting or equity trade.
Finally, it is a timely redress of the disproportionate influence on the policymaking process of the banks. For far too long discussions of financial architecture were dominated by the banks – to our, and ultimately their own detriment. But as recent events have demonstrated, when liquidity and capital shortages develop, it is as important to understand the sector that has the money as it is those who need it.
What is your vision for the UK asset management Industry going forward?
Ten years from now, I would like the UK to have become the location of choice for the global asset management industry. That is the national objective we must set ourselves.
Secondly, I want the industry's weight in shaping financial sector regulation and policy to be equal to that of the banking sector, both in the UK and across the EU.
The report specifically addresses how the asset management industry can better meet the needs of ordinary investors and people saving for retirement. Can you tell us more about what changes you would like to see?
The industry is far from perfect and the working group did not hesitate to note its shortcomings and recommend changes. For example, we acknowledge that our retail proposition is muddled by confusion and a measure of conflict of interest at the point of distribution of financial products. This is true to some extent of the UK. It is particularly true of a number of EU markets on the Continent. Some group members recommended the abolition of all sales commissions to resolve the issue once and for all. But all members believe that the cost of advice must be better distinguished and more easily distinguished from the cost of the product. In other words, it must be made clear who works for whom.
The FSA's retail distribution review shares this objective and, depending on how its findings are implemented, will mark a major step forward. The same principles must be implemented on the Continent if the UK industry is to have a level playing field on which to compete, and the EU saver the same benefits of transparency.
Another area for improvement is to simplify products for consumers in the UK. We have a complex and diverse range of tax-driven wrappers and incentives. There are different rules for pensions, ISAs and insurance bonds, and this can make it difficult for the consumer to fully understand what is being offered to them, and the benefits. The result is that consumers can be less motivated to invest in long-term savings products. A simplified regime could go some way to addressing this problem.
Finally, it was not the objective of the working group to address the wider issue of pensions savings. However, the group believes strongly that the current national savings trajectory is inadequate and that more can and must be done. There are real fears that the 2009 budget will mark the first step in the dismantling of higher-rate tax relief. Without new incentives further down the income scale, that would only discourage saving for retirement. Now might be the time to consider whether a radical recasting of incentives, which would make the fiscal subsidy the same at all income levels, would be workable.
